McDonald's Matches Estimates in 1Q - Analyst Blog

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McDonald's Corporation ( MCD ) posted first quarter 2012 earnings of $1.23 per share, in line with the Zacks Consensus Estimate. Reported earnings were 7% higher than the year-ago level of $1.15 per share.

However, excluding the unfavorable currency impact of one cent in the reported quarter, earnings grew 8.0% year over year. The year-over-year earnings growth was driven by higher comparable store sales across all regions.

Quarter Highlights

The company reported a 7% rise in revenues to $6.5 billion during the quarter and was in line with the Zacks Consensus Estimate. Excluding the negative impact of foreign currency translation, revenues grew 8.0% year over year.

Revenues from company-operated restaurants rose 7% to $4.4 billion while the same from franchise-operated restaurants jumped 8% to $2.1 billion. Total operating income grew 8% to $2.0 billion.

McDonald's global comparable sales maintained its growth momentum with healthy margins and benefited from an extra day of operation due to leap year in the quarter. Global comparable store sales climbed 7.3% during the quarter with United States contributing the maximum growth of 8.9%. The Asia/Pacific, Middle East and Africa (APMEA) region recorded comps growth of 5.5% while the Europe region registered an upside of 5.0%.

Product innovation, along with strong customer demand for Chicken McBites, core offerings like Filet-O-Fish, breakfast menu, McCafe beverage line-up as well as everyday value options bolstered U.S. comps and led to a 10% growth in operating income. Additionally, the upside in comps was driven by restaurant refurbishments and mild weather condition.

In Europe, operating income grew 4% (8% in constant currency), despite the ongoing negative macro headlines in the region and inclement winter in certain regions in February. The growth was backed by stronger performance in the U.K. and Russia and reasonable performance in France and Germany. Locally relevant menu choices, sustained focus on multiple-tier menu offerings and a restaurant reimaging program continued to drive market share gains.

In APMEA, operating income jumped 10% (7% in constant currency), driven by strong performance in Japan, Australia and China and continued focus on daypart value options, variety in menu as well as locally relevant items.

Company-operated expenses and franchised restaurant occupancy expenses saw a spike of 7% and 6%, respectively and selling, general and administrative expenses also increased 5% from the prior-year quarter.

Financial Position

In the first quarter of 2012, McDonald's returned $1.5 billion to its shareholders through share repurchases and dividend payments.

Outlook

The company expects the positive trend to continue in 2012 and global comparable sales for April are estimated at 4%.

Our Take

The Oak Brook, Illinois-based company continues to drive same-store sales while maintaining healthy margins. We believe that revenues will grow through menu innovation, unit expansion and strong comps momentum over the next few quarters.

Based on a strong balance sheet and consistent earnings, the stock provides relative safety and moderate growth prospects due to its exposure to the fast-growing international markets. Moreover, the franchising strategy that is predominant in McDonald's business model helps drive steady cash flow streams, solid margins and returns.

McDonald's has efficiently endured the recent economic turmoil in Europe. Despite the implementation of austerity measures, there were no signs of drastic slowdown.

On the flip side, increased commodity pressures as well as wages in the US, can lower the company's margins. Moreover, stiff competition from other quick-service restaurant operators, macroeconomic factors influencing consumer spending patterns still remain areas of concern.

The company also recently announced the retirement of present Chief Executive Officer ( CEO ) Jim Skinner. Effective July 1, 2012, the current Chief Operating Officer ( COO ) Thompson will serve as the CEO of McDonald's and subsequently Tim Fenton the President of McDonald's Asia, Pacific, Middle East and Africa (APMEA) will hold the office of COO.   We expect the transition to be smooth as both the promotees have long been associated with the company.

Consequently, the company has a Zacks #3 Rank (short-term Hold rating). We also reiterate our long-term Neutral recommendation.

One of McDonald's primary competitors, Yum! Brands Inc. ( YUM ), recently reported first quarter 2012 adjusted earnings of 76 cents per share, which beat the Zacks Consensus Estimate of 73 cents. Earnings increased 21% year over year mainly on the back of outperformance at its China division and other emerging markets.


 
MCDONALDS CORP ( MCD ): Free Stock Analysis Report
 
YUM! BRANDS INC ( YUM ): Free Stock Analysis Report
 
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Business , Stocks

Referenced Stocks: CEO , COO , MCD , YUM

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